In our present economy, the commercial loan workout might be the savior we have been looking for. Our economic recovery has only just started and that is after a long period of decline. We are not out of the woods yet. The FFIE (Federal Financial Institutions Examinations Council) sees the currant danger with CRE (Commercial Real Estate) loans and are trying to head them off at the pass. They see them a a delicate straw that can break the camel’s back. This is what they see.
Many of the CRE loans are using the land and equipment as collateral on the loans. Now, however, the value of both has fallen and will not fully recover for a good bit. This is key to why a commercial loan workout is needed. It is really commercial loss mitigation by avoiding industrial short sales. With out it, banks will be forced to close mills and factories for land that has lost value and sell equipment that can not be easily moved. To avoid this problem the government is trying to nudge the banks to work with borrowers of plants and such with a good habit of paying their loans. This lets the companies keep their mills, the banks get paid, and people have jobs. The FDIC see the CRE loans as the mortar that holds the bricks of the wall.
It is the same way banks work with homeowners. In the end it works out better for them to work with the mortgage than to be forced to seize the house, hold it for many months, then sell it for a fraction of it’s value. The commercial loan workout it is the same thing but on a larger scale and is key to the recovery.
